Duke Realty Investments

The little engine that could: Duke thinks small to get big Midwestern pragmatism - it's what defines Duke Realty Investments, an Indianapolis-based real estate investment trust with total assets worth more than $2 billion. Contributing to that success is a concept that all the Yankee ingenuity on Wall Street doesn't necessarily seem to grasp: Real estate is about satisfying people, not numbers.

"What drives this business is meeting customer needs, it's not being smarter than the next guy," explains Thomas Hefner, Duke's president and CEO. "We believe operators, not financial engineers, will basically dominate this business. Customer satisfaction will lead us to as far as we get."

To date, Duke has covered a lot of ground. Founded in 1972 as a private full-service real estate firm, the company went public in 1993 with offices in Indianapolis, Cincinnati and Columbus, Ohio. By 1997, Duke had entered St. Louis, Cleveland, Chicago, Minneapolis and Nashville, Tenn.

Duke certainly isn't timid about entering new markets. In fact, "dominate" is the word most often used by the company's senior management to describe its expansion strategy. And they're not just boasting, either. In markets where Duke gets 77% of its office and industrial income stream, it has at least 50% more square footage than its next largest competitor.

The most telling example of Duke's willingness to dominate a market occurred last year in Minneapolis. Over the course of one year, Duke went from zero to 6 million sq. ft. under management, making it the city's largest landlord outside the downtown area, thanks in part to the acquisition of RL Johnson, a fixture in Minneapolis for the past 25 years.

Unlike other REITs that rely solely on acquisitions to fuel growth, Duke's full-service approach - the company has internal departments to handle everything from leasing and management to development and construction - has helped the company remain strong while others scramble to find available capital as the threat of a recession looms.

"We're looking at this time as a great opportunity because prices are definitely coming down," explains Bob Chapman, executive vice president of acquisitions. "Overall, however, our strategy remains unchanged. We want to concentrate on supplementing what we have in existing markets. We don't need to acquire as much as other companies because we also can develop."

Chapman expects the company to do approximately $350 million in acquisitions this year but adds that Duke isn't in a hurry to grow. "We think we can double our size from $3.5 billion to $7 billion over the next three to five years just in our existing markets alone," he adds.

When Duke does expand, however, Chapman says that it will probably be in cities close to areas that it already serves such as Kansas City, Mo., Memphis, Tenn., and Pittsburgh.

But don't expect Duke to expand too much. The company's refrain is one of regional growth, and Chapman laughs off the possibility that Duke could one day be a global player.

Believing that regional players will outperform national companies, CEO Hefner says there are some advantages to being on the lower rung of real estate's first tier companies.

"We think we're big enough - we're at that size level now - where we disagree with Mr. Zell that you gotta be $10 billion," Hefner says. "There are some inefficiencies at that size that tend to creep in, offsetting the efficiencies that you create." A look at Duke's balance sheet seems to confirm Hefner's opinion that bigger isn't necessarily better.

In 1997 the company's total funds from operation increased 41% to $107 million on revenues of $252 million. More significantly, Duke's total return to shareholders last year was 32.8% compared to 20.3% for the NAREIT Equity Index and 33.4% for the S&P 500 Index.

Understanding the value of a dollar also adds to Duke's fiscal well being, especially now, as belt-tightening time rolls around.

Hefner is especially proud of what he calls Duke's adept use of capital adding that, "when you look at our growth earnings per share vs. our growth in asset size, we're more efficient in that arena than most others."

Citing Merrill Lynch's recent decision to cut earnings expectations for REITs across the board, resulting in an average reduction of about 1.7%, Duke Vice President of Investor Relations Tom Peck, thinks the market will soon have a renewed appreciation for the company's fiscal restraint. He points to Duke's consistent performance - it's had 11 quarters in a row of 10% or better growth in FFO per share - as evidence of its solid track record.

Still, it's people and teamwork that contribute most to Duke's bottom line, which is no surprise, really, when you consider the number of services the company offers its clients. With the exception of architects, which the company hires in local markets, Duke has internal departments to handle every aspect of a job - from site selection to property management. It's what Duke likes to call "the cradle to grave approach."

"We don't rely on third-party operators," says Gary Burk, president of construction services. "It' s the ultimate way of putting our money where our mouth is. We're not going to rely on someone else to get the job done on time and at the right price point."

The ability to have ultimate control over a project is one thing Burk, who oversaw nearly $320 million worth of new projects in 1997, relishes. However, he admits it's not without its downside. "It's a bit humbling when you're involved throughout the entire process because you've got to live with what you've made; you can't just wash your hands at some point and say 'Boy, I'm glad I'm outta that one,' " he says.

Still, it's that level of involvement and commitment that Burk uses to great effect when recruiting new talent. "We have a lot of bright, young engineers who love coming in and being part of something and having responsibility for a project from stem to stern. Good people relish that," he adds.

In order to avoid many of the pitfalls that can accompany a project from "stem to stern," Burk's team prefers realism - concrete-and-steel-talk - over the allure of 'grand concepts' that never seem to translate into actual buildings.

"We get very specific, very quickly about build-to-suit projects," Burk explains. "We sit down and find out how a client is going to use a space, what they're hoping to do with it, how long they'll be there and what their expansion plans are."

Once Burk's construction team finishes a project, John Nemecek's property management group moves in to service the new tenants.

Nemecek, president of Duke's property/asset management unit, supervises more than 500 properties in eight markets and says customer satisfaction is job No. 1.

"The nasty lesson of the '80s was empty buildings," Nemecek remarks. "It doesn't take a rocket scientist to figure out that the key element in our business is taking care of clients."

In addition to providing the basics - heat, air, water and security - Nemecek says good communication is a priority for proper customer service.

"Good communication means that when we have a tenant event like a night out at the ball game we put a notice on each and every employee's chair rather than just sending a notice to the office manager - it's amazing how many more people show up," he says.

Duke also surveys tenants from the time they the take occupancy to the day they move as part of the company's effort to keep communication flowing.

"You always have to do what you say you're going to when you say you're going to," Nemecek adds. "I think people like working together when they can trust each other."

Midwestern pragmatism and rules to play by - they're what define Duke Realty Investments.